Confidence or Expertise? - Simple Equation

Confidence or Expertise?

Harish Rao - Thursday, August 27, 2009 12:06 AM

When engaging the services of a Financial Advisor / Investment Counselor, what is it that you value most? Confidence or Expertise. (click below to listen to a podcast with Harish Rao on choosing an investment advisor)

 

Most Investment Advisors (IA) I have spoken to seem to be convinced that it is Confidence. Some reason that Confidence stems from Expertise. Fair enough.  

 

In my judgment, I would tend to agree with most Advisors. Yes, the Indian investor seems to place more faith on the Confident Advisor than the Expert Advisor.  After all, investment management is really about expectations management. You will always have a sour faced investor with 25% compounded returns and a cherubic one, content with 10% CAGR.

 

A successful IA combines high achievement drive with high empathy. This enables her to get maximum share of wallet from her clients. The High Achievement Drive - High Empathy combo is an all-season winner. These are IAs who are determined to help you achieve your financial objectives, while achieving theirs too. They believe every investment road-map has to be win-win. Usually, they exhibit superior emotional intelligence and can handle ambiguity with more calm. Invariably, an investor would refer his friends to such an IA.

 

However, the road to the Investment Selling glory is littered with the corpses of the High Achievement Drive - Low Empathy practitioners. These are bull market stallions whose gallop turns into a wobble when the cycle turns. They are ideally suited for Used Car sales, but have sauntered into Investment Advisory services, complete with bespoke shirts and fancy Blackberrys. Their spurious confidence has over time caused so much havoc, with their destructive advice evident in so many forms - PMS, ULIPs for kids, structured products and a heavily churned equity book. In the end, post-expenses, many such portfolios would be underperforming the index. (But to be fair, these journeymen love their customer's life : they prescribe so much of insurance - usually ULIP or Endowment, but rarely Term).

 

So, is there something that is more important than Confidence and Expertise : INTEGRITY.

 

Lest you get me wrong, the bad ones exist not just among the smart set. In fact, many amongst the smart set are really very smart and hard working. There are quite a few dubious advisors amongst those hawking traditional / legacy products. These folks will want to sell you stuff that earns them the highest brokerage, while saddling you with expensive long term products that are financial handcuffs.

 

So, if you think your IA has the highest level of Integrity, than let Confidence and Expertise take a back seat.  It's on Integrity that you got to strap the seat belt.

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5 Comment

From swarup

August 27, 2009 1:00 PM
Harish, As always well written...though I would differ on the confidence part. I am big believer of the Robert Kiyosaki statement -" Tne Investor is never risky, the advisor is risky". Equity investing is all about belief and confidence. It is a fact the though the NAVs have travelled, the investor has not taken the journey with it. I keep on saying this - The only person who has made money in MFs is the one who has lost his account statement!! I keep on hearing that the investor is not long term in India. But I have seen most of the distributors being around in the market for the last decade and their respective clients being with them for the whole period too. So how can one say that the investor is not long term? Though I agree that Integrity is important- I think it should be a given factor for any business. Confidence is the key to taking financial advising to the next level for a distributor. It is confidence which will lead to the inherent belief that one has to stay invested to create wealth. You may not be right in all your calls in the market, but one can easily make wealth if you are more right than wrong amongst all your calls! These are personal views!

From Harish Rao

August 27, 2009 4:20 PM
Swarup : Super observations. Actually, early in my article I agreed that confidence was the more important one as investment or investor management is all about expectations management. But sometimes confidence turns into cockiness and that's the beginning of all troubles. And how I wish that Integrity is a given in this business.

From kannan.k.v.

August 27, 2009 4:43 PM
Harish,certainly integrity should be the foundation in this business of investment management and advisory.It should be an integrated integrity and not be looked upon as the soul responsibilty of the much maligned distributor/advisor/wealthmanager community.What I maen is that all players in this investment space like the product manufacturers, their respective regulators and the investors themselves should have integrity as the cornerstone of their thoughts and actions.If this can happen then certainly integrity would be a given in this business.

From Harish Rao

August 27, 2009 5:22 PM
Kannan : Terrific point. We are already seeing the effects of a 'friendly regulatory regime' from one of the regulators. That has obviously trickled down to the players too.

From Pravin

September 16, 2009 9:20 AM
Cognitive dissonance and self attribution bias.I see these as the two operative sentiments/behavioural tendencies that exist in choosing investment advisers.

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